Is Pliant Therapeutics (NASDAQ:PLRX) Using Debt Sensibly?

Howard Marks put it nicely when he said that, rather than worrying about share price volatility, 'The possibility of permanent loss is the risk I worry about... and every practical investor I know worries about.' So it seems the smart money knows that debt - which is usually involved in bankruptcies - is a very important factor, when you assess how risky a company is. We note that Pliant Therapeutics, Inc. (NASDAQ:PLRX) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

What Risk Does Debt Bring?

Debt assists a business until the business has trouble paying it off, either with new capital or with free cash flow. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. While that is not too common, we often do see indebted companies permanently diluting shareholders because lenders force them to raise capital at a distressed price. By replacing dilution, though, debt can be an extremely good tool for businesses that need capital to invest in growth at high rates of return. When we think about a company's use of debt, we first look at cash and debt together.

Check out our latest analysis for Pliant Therapeutics

What Is Pliant Therapeutics's Net Debt?

As you can see below, at the end of March 2023, Pliant Therapeutics had US$9.96m of debt, up from none a year ago. Click the image for more detail. But on the other hand it also has US$577.3m in cash, leading to a US$567.4m net cash position.

How Strong Is Pliant Therapeutics' Balance Sheet?

Zooming in on the latest balance sheet data, we can see that Pliant Therapeutics had liabilities of US$23.2m due within 12 months and liabilities of US$12.8m due beyond that. On the other hand, it had cash of US$577.3m and US$4.76m worth of receivables due within a year. So it actually has US$546.1m more liquid assets than total liabilities.

This surplus strongly suggests that Pliant Therapeutics has a rock-solid balance sheet (and the debt is of no concern whatsoever). With this in mind one could posit that its balance sheet means the company is able to handle some adversity. Succinctly put, Pliant Therapeutics boasts net cash, so it's fair to say it does not have a heavy debt load! The balance sheet is clearly the area to focus on when you are analysing debt. But ultimately the future profitability of the business will decide if Pliant Therapeutics can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

Over 12 months, Pliant Therapeutics reported revenue of US$9.8m, which is a gain of 47%, although it did not report any earnings before interest and tax. With any luck the company will be able to grow its way to profitability.

So How Risky Is Pliant Therapeutics?

We have no doubt that loss making companies are, in general, riskier than profitable ones. And the fact is that over the last twelve months Pliant Therapeutics lost money at the earnings before interest and tax (EBIT) line. And over the same period it saw negative free cash outflow of US$106m and booked a US$133m accounting loss. Given it only has net cash of US$567.4m, the company may need to raise more capital if it doesn't reach break-even soon. With very solid revenue growth in the last year, Pliant Therapeutics may be on a path to profitability. By investing before those profits, shareholders take on more risk in the hope of bigger rewards. There's no doubt that we learn most about debt from the balance sheet. But ultimately, every company can contain risks that exist outside of the balance sheet. Be aware that Pliant Therapeutics is showing 3 warning signs in our investment analysis , and 1 of those doesn't sit too well with us...

When all is said and done, sometimes its easier to focus on companies that don't even need debt. Readers can access a list of growth stocks with zero net debt 100% free, right now.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.